Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 20 years. He is based in the greater New York City area and may be reached at info@ip-watch.ch.

The strategy was breathtaking in its boldness. Just days before the USPTO was to hear a challenge to Allergan Inc.’s patents on a dry-eye drug, Restasis, the company transferred those patents to a Native American tribe; the tribe then sought to dismiss the USPTO proceedings by asserting sovereign immunity. Following this action, a number of other patentees made similar transfers to Native tribes, in order to protect their patents. More patentees were poised to do so, should this ploy prove effective. It, however, did not. On 20 July, the Federal Circuit Court of Appeals ruled the tribe’s sovereign immunity did not protect its patents from USPTO review. The ruling thus kept intact a key component of America’s patent system.

The deal between Allergan and the Saint Regis Mohawk Tribe was odd and, according to many, rather suspicious. Instead of the tribe paying a great deal of money for Allergan’s patents on a blockbuster drug, Allergan paid the tribe millions to accept the patents. More specifically, Allergan paid the tribe $13.75 million up front, plus annual royalties of $15 million in return for the tribe leasing the patents back to Allergan.

This was a sham transaction, according to many observers. It had no business or economic justification, other than shielding the patents from USPTO scrutiny.

That novel attempt to buy immunity from USPTO review stunned many IP experts. “I’ve spent my career studying tricks that drug companies use to maximize their patent rights, and I’ve never seen anything like this,” said Prof. Michael A. Carrier of Rutgers Law School.

Beyond Immunity

Allergan’s attempt to obtain immunity soon ran into trouble. The USPTO ruled that the tribe could not claim sovereign immunity in the agency’s inter partes review (IPR) proceedings, so the agency’s review of the Restasis patents could proceed.

Allergan and the tribe appealed. Now the USPTO’s ruling has been upheld [pdf] by the Federal Circuit (which is sometimes called “America’s patent court”).

The three-judge panel noted that legal actions against Native American tribes are generally barred by the tribes’ sovereign immunity. This immunity extends to federal administrative actions that are similar to civil litigation in federal court. However, the immunity does not apply to other types of investigatory or adjudicatory actions by federal agencies.

The question for the court was whether USPTO inter partes reviews were more like civil litigation or more like other types of agency actions. “Ultimately,” the court declared, “several factors convince us that IPR is more like an agency enforcement action than a civil suit brought by a private party.”

One key factor was that private parties did not have the right to institute IPR proceedings. Such parties could request an IPR review of a patent, but the USPTO’s director had the final say over whether such a review would commence. The director “possesses broad discretion in deciding whether to institute review,” the court stated.

A second key factor was that an IPR could proceed without the participation of either the entity that requested the proceeding or the owner of the challenged patent. “This reinforces the view that IPR is an act by the agency in reconsidering its own grant of a public franchise,” the court wrote.

The judges found that IPRs differ in important ways from civil litigation and are instead exercises of federal administrative power over patent quality. The court stated, “The Director’s important role as a gatekeeper and the Board’s authority to proceed in the absence of the parties convinces us that the USPTO is acting as the United States in its role as a superior sovereign to reconsider a prior administrative grant and protect the public interest in keeping patent monopolies ‘within their legitimate scope.’” Thus, the court ruled, “we conclude that tribal sovereign immunity cannot be asserted in [an] IPR.”

Winners and Losers

Had the court ruled in favor of Allergan and the Native tribe, the consequences to the US patent system would have been dire. “That would have completely upended the pharmaceutical industry. All the companies would have been racing to protect their patents through the safeguard of sovereign immunity,” said Stephen R. Auten, a partner in the law firm of Taft Stettinius & Hollister.

Many companies in other industries also would have sought protection from Native American tribes. After the Allergan deal was announced, for instance, 44 technology patents reportedly had been transferred to two Native American tribes, presumably to protect the patents from IPRs.

The Federal Circuit’s ruling thus protects an important means to weed out wrongfully-issued patents. “The IPR system plays a crucial role in ensuring bad patents are overturned,” said Carrier. He added, “There’s a strong public policy in invalidating patents that are not valid.”

Still, many pharmaceutical companies are unhappy about the Federal Circuit’s ruling. Because a blockbuster drug with billions in annual revenue can be based on a single patent, drug patentees want to do whatever they can to protect their patents – including keeping the patents out of IPR. “IPR is a fairly robust mechanism to challenge pharmaceutical patents,” said Prof. Arti Rai of Duke Law School.

Not all pharmaceutical patents are at risk. Innovative patents should have little trouble surviving IPRs. The patents likely to be struck down in IPRs are secondary patents – sometimes called “evergreen patents.” These patents cover minor modifications to an expiring drug patent (e.g., putting the drug in a capsule rather than a pill), and they are made in an effort to extend the drug company’s exclusive patent rights in the drug. “This is not a good day for protecting secondary patents,” said Rai.

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